Whole Foods Market: Expect a Turnaround

Whole Foods Market (WFM) released its third quarter (12 weeks ended 3rd July) results on 27th July. The company reported record total sales of $ 3.7 billion for the quarter. The net income was 3.2 % of sales at $ 120 million and the EPS was $ 0.37 per diluted share. The company reported an EBITDA of $ 326 million which was 8.8 % of total sales.

This improvement more than offset the decreases in transactions and average price per item. However, the comparable store sales declined by 2.6 % on a year-over-year basis.

The company achieved a 13 % return on invested capital (ROIC) on an adjusted basis.

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The cash flow generated from operation was $ 189 million while $ 44 million of quarterly dividends were disbursed to the shareholders. The company also bought 6.5 million shares of common stock for $ 195 million. At the end of the quarter, the company had $ 1.1 billion of available capital and about the same amount of debt on its balance sheet.

One of the highlights of Whole Foods’ third quarter was the opening of the company’s first and second 365 stores. These stores offer an all-new format to the customers and are receiving an “overwhelmingly positive” response in return. Due to their increased affordability and convenience, the 365 stores are able to attract a broader customer base than the earlier format of stores. These stores give an enhanced level of digital experience to the customers and are commanding larger average basket sizes i.e. more number of units moving per invoice compared to Whole Foods’ previous average.

Competition and Future prospects:

The competition has increased and Whole Foods Market has a long history of significantly higher prices compared to its competitors. A recent comparison report published by MarketWatch compared the prices of 14 grocery items sold by Whole Foods with comparable items sold by its competitors like Trader Joe’s, Safeway and Target. And they discovered Whole Foods to be the most expensive and that too by a wide margin.

Selling at the highest prices simply exposes the company to the greatest threat that the mainstreaming of natural organics offers to the company’s long term growth prospects especially when your comparable store sales growth trends are running negative.

The competitors are ahead and are also moving fast. For instance, Wal-Mart started the year with just 22 markets but leap-frogged to 40 markets well before the end of the last quarter. The world’s largest retailer is also trying to explore more efficient delivery options and might tie up with the likes of Uber and Lyft's driver networks in the future.

The other giant retailer, Target is also focusing on its grocery segment and added 1,000 new items, including a plethora of organic and gluten-free options this April. Similarly, other competitors like Kroger, Costco, Trader Joe's, and a handful of other grocers across the country sell quality stuff but at much lower prices than Whole Foods. And by entering into the organics business one by one, they have crowded the place and increased the difficulty level for Whole Foods.

And the price differences are not meager. They are of the order of 50 % for many comparable items at Wal-Mart, Target and Kroger etc. Hence, it is now up to the 365 format of stores to bring back the value-oriented customers to Whole Foods given its lower capital and operating costs.

Only if the 365 stores click for Whole Foods, they have something good to expect in the future. Otherwise, we might just see the comps deteriorating as we have over the past several quarters. But before that, the 365 format needs to prove its mettle before we could go for this stock.

Conclusion:

There is good and bad news for Whole Foods Market. The good news is that the market in which it deals is itself expanding. And it will keep on expanding till we grow in population. The new stores, especially the 365 stores, could be able to increase the performance going forward.

However, the bad news is that the market has become crowded. Not just crowded but crowded with low cost and low price players which are all set to make life tough for Whole Foods despite all its claims about the quality that it offers. After a point, the customer does get concerned about his pocket. And that’s where Whole Foods is proving uncompetitive among its rivals. Therefore, the company’s future prospects are not looking great at present and investing in this stock might thus bring regret to the investors in future.